The property sector and its debts are possibly the biggest financial mess in China’s history.
By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.
The crackdowns by Chinese authorities on some of the biggest hype-and-hoopla industries have sent investors heading for the exits. There is a crackdown on debt to keep the financial system from imploding. There’s a crackdown on property speculation to tamp down on housing prices and on debt. There’s a crackdown on big tech – mostly internet, social media, and online gaming companies – for their monopolistic size and practices and a slew of other issues.
There’s a crackdown on education tech companies that sell off-campus educational courses that have driven the costs of education into the sky, discouraging Chinese couples from having more than one child. There’s a crackdown on all kinds of other activities that include reporting financial news and analysis in a way that the government doesn’t approve.
There are all kinds of reasons for these crackdowns, including the push by President Xi to create “common prosperity,” which has become a mantra to fight the ballooning wealth disparity linked to the surge in asset prices, including home prices that are now making homes unaffordable for the masses.
The crackdowns already resulted in some spectacular effects.
Wall Street is heavily involved in the stocks and bonds of these companies, both in the US and in China, many of which have dropped sharply, and some have collapsed.
Many Chinese companies have issued American Depositary Receipts, or ADRs, such as Alibaba. These ADRs aren’t actual stocks but were issued by an offshore mailbox entity in the Cayman Islands or wherever, that has a contract with the actual company in China.
Wall Street firms make a fortune setting up these ADRs, selling them to investors, managing them in their mutual funds and ETFs, etc. Wall Street makes money coming and going on these ADRs.
But those ADRs have unraveled. The Golden Dragon China ETF, which tracks these ADRs, has plunged by 46% since February, unwinding the entire pandemic hype-and-hoopla spike.
In the Chinese markets, China’s crackdown has caused the shares of affected companies to plunge by a combined $1.5 trillion in a matter of months at the low point a little while ago.
But now these Wall Street titans that made huge amounts of money from China’s debt bubble, from the wild property speculation, from monopolistic tech companies, from the hype and hoopla, from their dealings in China, well, they’ve had enough of these crackdowns.
A Wall Street delegation composed of top executives from Goldman Sachs, mega-asset manager BlackRock, PE firm Blackstone, Citadel, Fidelity, among others, had a three-hour powwow on Thursday with Chinese regulators that included the vice-chairman of the China Securities Regulatory Commission and the head of the People’s Bank of China.
There was no official announcement, but sources talked to Bloomberg about it. According to these sources, Chinese regulators defended the crackdowns, and said that they were designed to strengthen regulations, improve data privacy – which is an even funnier concept in China than in the US – strengthen national security, and reduce social anxiety.
Some parts of these crackdowns are a combination of silly and scary. But other parts of the crackdowns should have happened a long time ago and would have been a lot less painful then.
Cracking down on monopolistic Big Tech companies, well, hats off – given what we’ve got in the US where Big Tech has run the show for years with monopolistic structures and behaviors, and the government is just now gingerly trying to use antitrust lawsuits to confront them.
But these US companies have now gotten so huge and have unlimited resources, with market capitalizations that exceed $1 trillion or even $2 trillion each, that they can throw money around for lobbying and legal maneuvers, and they will drag this out for years, outgunning the government lawyers at every twist and turn. The US antitrust actions are way late. This should have happened years ago before capital was this concentrated and companies this big and powerful.
Maybe China learned a lesson.
In China, there is nothing gingerly about it. The government has put down its foot to allow for more competition and to shake up the sector, knock down the power of the billionaires a few notches, and reduce wealth inequality from the top down.
And these widespread crackdowns already accomplished one thing: They began to deflate this enormous hype and hoopla apparatus about stocks and IPOs and risky debt and iffy wealth management products.
Most crucial is the crackdown on the property industry, with its mega-amounts of debt. Smaller developers have already defaulted, and others are approaching default.
Evergrande is China’s second largest property developer. It’s opaque and huge. It has 200 offshore subsidiaries and nearly 2,000 onshore subsidiaries that it owns either wholly or partially, according to Goldman Sachs. And it’s on the verge of collapse.
It owes bondholders, banks, shadow banks, suppliers, contractors, homebuyers, and retail investors the equivalent of over $300 billion. A portion of its debts are junk-rated dollar bonds that it sold to international investors in the offshore market.
The property sector and its debts are possibly the biggest financial mess in China’s history.
Last year, Chinese authorities drew the so-called “three red lines” into the sand for real-estate developers. These are leverage ratios that developers cannot exceed. And if they exceed them, they cannot take on new debts.
Evergrande hit those red lines and could not take on new debts. This prevented the company from raising new money to service its existing obligations, and it is now defaulting serially on just about everything that comes due.
Evergrande has already paid suppliers with now worthless corporate paper when it ran out of actual money. These suppliers are now protesting in the streets. It started paying contractors with unfinished apartments instead of with actual money. The contractors are trying to sell those unfinished apartments of dubious value. It has already defaulted on interest payments on loans. Etc. etc.
Evergrande’s debts are tightly woven into the broader financial sectors and derivatives, and that’s one of the avenues by which contagion would spread if Chinese authorities lose control over the process.
But Chinese authorities have some unique tools to prevent a financial panic: The state owns the largest four banks and can tell them to lend. It owns the central bank and can tell it to do whatever it takes. It can lean on large asset managers and brokers to buy shares and bonds. It owns much of the media and can lean on other outlets and thereby controls the message.
On Thursday, September 23rd, interest payments on two onshore bond issues are coming due. If Evergrande doesn’t make those interest payments, it would be in default of these bonds, its first bond defaults, and at some point, creditors are going to attempt to salvage what is left.
The crackdown on debt and the vastly overindebted property sector has hit shareholders, bondholders, and other creditors. It looks like regulators are implementing a forced deleveraging of the sector. And it looks like, finally, bondholders and shareholders will get to eat the losses from this forced deleveraging rather than getting bailed out. And it looks like China will then attempt to prevent the spread of contagion from there.
Evergrande raised money for years by borrowing from banks and issuing bonds, and it borrowed directly from retail investors by preselling them apartments in unfinished projects and by selling them wealth management products, and this worked for years with loads of new money coming in to pay interest and principal to existing investors.
Evergrande has presold over 1.4 million unfinished apartments valued at $200 billion, according to research firm Capital Economics, cited by the Wall Street Journal. It thereby borrowed from its customers to finish the apartments. But now the money is gone and many of those projects aren’t finished. And work has stopped on those projects because Evergrande hasn’t paid contractors and suppliers.
Chinese middle-class investors sink their life savings into apartments like Americans buy stocks. The wealthy buy multiple apartments. They do this not necessarily to be rented out but for capital gains.
Evergrande took some of this money it had raised from these investors and expanded into EV manufacturing, theme parks, healthcare services, and bottled water. It’s now trying to sell those assets.
But that may be tough. The publicly traded portion of the shares of its EV company, China Evergrande New Energy Vehicle Group, trade in Hong Kong. And they totally collapsed, including by an additional 15% on Friday. They’re down 95% from the peak in April.
With Evergrande, regulators were successful in both tamping down on debt and on property speculation. It looks like they will not bail out the bondholders and other major creditors. It looks like they’re trying to make an example of Evergrande.
But then there are the many retail investors that are owed apartments and retail investors that have sunk their life savings into Evergrande’s wealth management products; and the suppliers and contractors that haven’t been paid. And when they’re protesting in the street – which they have started doing – Beijing will likely step in to bail them out in some form, as it has done before in similar situations, because it fears social instability even more than the implosion of the financial system.
And it looks like the government is going to accept the crackdown’s spill-over effects into the broader economy as the lesser cost, and they seem confident that they can keep contagion under control with the tools that they have.
I assume that Evergrande will undergo a debt restructuring in some orderly fashion, rather than a disorderly collapse, with unfinished properties getting handed to other developers to finish, and with creditors, bondholders, and shareholders picking through the debris and taking their losses.
And it looks like shareholders are going to be hit the hardest, as should be the case in a debt restructuring. But there is a twist.
Evergrande’s founder and his wife own the vast majority of the shares. Evergrande has paid out $5.3 billion in dividends to its shareholders since October 2018, according to the Wall Street Journal. The vast majority of these dividends went to the founder and his wife. The dividends and the shares, when they were still worth something, put the founder among the richest people in China.
Even if the company collapses and the shares go to zero, the founder and his wife will still have the billions they received in dividend payments. And they will remain immensely wealthy unless the government decides to crack down on them further.
Taking another pair of billionaires down a few notches fits into the recent theme of clipping the wings of billionaires before they get so rich and powerful that they could threaten the government. Alibaba founder Jack Ma and others have already undergone that treatment. And it would help address the rising wealth inequality that was caused by soaring asset prices, and it would do so by bringing the top down.
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It’s all way too late. There have been Chinese ghost cities for over a decade. Closing the barn door after the horse has died of old age and its bones are littering the pasture is pointless. The pain is coming. BIG PAIN.
The ghost cities are now coming to life. Bloomberg had an article on this very topic.
Things can change.
One of the big ghost cities, did have some people move in, but there are still countless ghost cities throughout China. As well as, huge overbuilding of buildings in existing cities. Last I heard, there was less ghost cities being built, in favor of overbuilding in existing cities. This shift has likely been the case for roughly 5 years at least.
It’s hard to keep track of overbuilding in cities for many reasons. For instance, many young people live in so called ant colonies (crowed group living, sometimes in basements, sometimes even in areas not originally intended as living spaces) as well as the migrant workers (rural workers without household registration) crowding into shared apartments. You might have say 100 plus people, living in an 80 unit building. But 90 of those people are living in only 15% of the units. While of course, most apartment buildings aren’t like this, it’s very common. With the black screen the CCP places over China, it’s hard to keep track of stuff like this. There are nearly 300 million migrant workers in China, these are actual Chinese citizens, who lack the same rights as those with household registration.
In China and some other places, apartments are sold typically without flooring, cabinets, or many other things, people might expect to come included, this allows the buyers to customize the apartment.
You might have a 10 story apartment building, with the first 2 floors used as crowed shared living, a few apartments throughout used as single family units, and the rest of the apartments are still concrete shells. At night the building owner might light up the whole outside. Going past such a building on the street, it might seem to be finished and occupied, but inside 70% of it is undone. Stuff like this is common, although probably most of the time, the shared units are scattered throughout building.
Amen. Fraud became endemic in the CCP’s China. We do not know what other financial-hole skeletons are in the other Chinese, real estate developers’ closets. My guess is the skeletons will be enormous, the size of that of the blue whale.
Crackdowns on bad banking. They own the central bank. Shadow banking. Paying off suppliers with worthless paper. Middle class buying too much real estate. Wall Street is advising them. The rich stay rich regardless of what happens. So basically they’ve become America.
My theory, after spending two years as Peace Corps math teacher in West Africa (1976-78):
When cultures merge, the result is often an unfortunate combination of the worst aspects of each culture. Sort of a Murphy’s law of globalism.
No one who taught in Africa is hopeful. Paul Theroux, my ex. ( Nigeria) Huge oil wealth all stolen. Nigeria had the nerve to ask the World Bank for some pittance, 50 million? WB told them to go to IMF!
They’ve all gone downhill since independence. Lagos now has a US advisory: don’t get into a taxi. Be met at airport. Redmond O’Hanlan was asked to please send the French back by village headman.
However, the Roman invasion worked for Britain. After a few years, the average Brit was better off. Then came roads, still in use.
After conquest, legion would move on. But if an uprising forced it to come back…
I think the Wall Street + China meeting was virtual, and the first one was held in 2018 at the behest of the Chinese because they were frustrated with Trump
It’s also a total farce. The Chinese government doesn’t owe Wall Street or any of it’s firms an explanation. If they don’t like it, they can stuff it. China doesn’t need them anymore.
If you want to be on the New York stock market, there are certain rules you have to follow. The CCP and it’s minions seems to think, that the CCP is above the rules; it isn’t. The companies in China, should simply not be allowed on foreign stock markets. The CCP controlled companies, joined the New York stock exchange and then broke the rules, as well as the CCP breaking trade rules.
Xi wants to put China on the same path as North Korea, other countries need to pull out of China, to minimize their exposure to such nonsense. Let’s see how powerful the CCP is then.
Thomas Roberts,
Western capitalists foolishly thought that the PRC governed by the CCC would someday become the financial capitalists and plutocratic nation-states and in one instance a monetarist union that the West had devolved into. The West is largely governed by kleptocrats, particularly in the US. I guess these masters of the universe never looked at the PRC’s balance sheet and what they own. As Wolf pointed out the PRC owns the four biggest banks and the PBOC. What Wolf didn’t add is that many of state owned companies e.g., steel, transportation, utilities, etc., don’t permit equity stakes from Western capital. What a novel idea! Assets that are critical to a nation’s economic, social and political health and national security are owned by the government.
In the West we have foolishly turned over our monetary system over to the greed of Wall Street, the City of London, Brussels, Frankfurt, Paris, Rome, Madrid, and to a lesser extent Tokyo central banks and their indigenous TBTF banksters. In turn they have gutted critical industries, local governments, their people and some nation states to the point that now under debt peonage.
China has done what the West should’ve done decades ago.
I congratulate them on their goal of common prosperity. It is TBD if they are successful in the execution since power concentrated into one political party has not over the long run proven to be long-lasting for the masses or the country.
China is no longer progressing forward, if Xi never became the ruler. It’s possible that China could have been far more powerful than today, and been an actual contender for world’s strongest country. Xi has blown that chance. The whole China conquer the world thing is not going to happen. The issue is how long the rest of the world plays along with the CCP’s nonsense. Xi took the CCP, which was allowing China to progress towards being more open and free, and wanted to make himself an all powerful ruler (based on Mao and Stalin), and turned China in a very bad direction. The CCP has passed many points of no return, since he’s taken over. We’ll never know if the CCP could have actually democratized, but it’s not going to happen now. China was never as advanced as people think it was, but had the world allowed the one sided nature of CCP relations to continue, it could have continued to move forward, if Xi never had become ruler.
China is being more and more cut off from key technologies and there is nothing, that can only be made in China. Manufacturing is shifting with ever greater momentum away from China. China is alot weaker than people think and most of the industries it currently “domimates” are simple things to make. China also doesn’t control any resources like iron ore or anything else. This makes it vulnerable. Rare earth minerals are all around and new technologies will allow them to be mined more cleanly.
The tallies in Afghanistan, recently contacted South Korea about developing it’s lithium resources, we’ll have to see how that works. Controlling Afghanistan’s lithium deposits, was one of the supposed aces up china’s sleeve.
Nonsense like the Xi virus pandemic, are a direct result of allowing the CCP to run wild. If the CCP is allowed to continue running wild and doing things like subverting the WHO, far more deadly pandemics, could be on the horizon.
So:
If the Congress raises the debt ceiling is this going to tie into all this and what’s next
More deficit spending, more stimulus, more bailouts.
I have been talking to all the people I know in China about this. There is a lot of hysteria in the American financial press, but very few people are concerned in China. It’s only one company. It will be bailed out or nationalized. Life will go on. The sun will rise very day, the lights will be on at night, peple will go to work and celebrate holidays, no big deal. The citizens waiting for their homes to be finished will be taken care of by a different builder. This happens a lot. What outsiders called ghost cities are often what a short term visitor sees between construction companies. The residents see the long term completion and the entire process. One company fails and another takes over. I live one such complex in Qingdao. A bigger story would be America printing over 10 TRILLION dollars in the past few years.
A guess, the Chinese government will take care of those who have bought a house, workers, contractors and suppliers so they get paid.
Big investors, bond holders, foreign investors and the like will take a loss. Chinese banks will take a loss, but keept afloat.
It will be interesting to see if the government go after previous paid share dividends.
Kind of like the exact opposite of the US.
Agree. Keep the big picture in mind. Ray Dalio is right in my mind..
“… very few people are concerned in China.”
very few people in China are informed … of anything
It’s amazing how you can suppress public knowledge when a ruling party controls all the printing presses and viciously suppresses (or “disappears”) dissenting voices, isn’t it?
Don’t. Let. That. Happen. Here.
Different countries, different customs.
It’s amazing how you can supress public knowledge when a few own all the media conglomerates and vicously supress ( or deplatform) dissenting voices, isn’t it? 😉
Exactly. But in one country, the dissenters still have options to create their own free speech platforms, voices independent of the Supreme Leader can still be heard publicly in the halls of government, and doctors and scientists can derail the ruling party’s plans by pointing out inconvenient facts – without risking their lives.
Situation dire in both cases, but there’s more hope on one side of the ocean than the other.
wisdom seeker,
Oh you didn’t know, the CCP and especially Xi, are perfect benevolent overlords. Everything is so perfect about them. When they fart, the whole room smells like cinnamon. If any of them gets acne, they can pick it off, and plant it in the desert, and trees will grow, without the need for water.
FIFA
very few people in USA are informed … of anything
Why? Are you saying that the populace is uneducated or just under informed? That’s just not true, look at how much we spend on education… and how great our media is in telling people about the facts (note I specifically didn’t say all of the facts)
Gawd, I am in sarcasm overdrive mode today.
I can tell you have never been there.
It’s precisely because I’ve “been there” (and have longstanding family connections) that I say these things.
The good news is that no one believes the propaganda.
The bad news is that they don’t know what to believe.
It is true that life will go on, but the Chinese system is trending towards less freedom and that’s not a good thing.
“The bad news is that they don’t know what to believe.”
Kind of like here in the U.S. these days.
@WS
Yup, and in the US we are trending toward more freedom.
Enabled by the honest brokers of facts and truth: our media, which is why sites like this one are gaining more popularity.
Now I understand everything. Uh huh.
Well they just blew up a huge complex of towers… the video is online. Sat for years with no demand, So at least one was a ghost city.
Or was it shoddy build?
It is common that in a building boom quite some entrepeneurs skimp on build quality. It is not only in China rather new constructions have been torn down after a few years due to sub standard build quality. Some have not even been finished.
Youtube have the demolition of a high rise, I think in Florida that was never finished due to bad fundation.
There’s one coming up in San Francisco called Millenium Towers. It was leaning and continuing to lean more. A $100 million project to stop the leaning caused the whole building to sink, so they stopped. It is only ten years old and people paid up to $13 million dollars for an apartment there.
The topic is not construction mistakes which happen everywhere.
The point and relevance of the demolished complex in China is that after 8 years there was no demand for them.
Since they are sold in China as unfinished concrete shells, it would have to be one hell of a construction error to doom the whole complex.
1) They said the same thing when Bear Stearns and Lehman failed. They always reassure the public to prevent banking panics, but they’re not always right. “The damage is contained to subprime”, said the Fed chair at the time. Then everything crashed and the sucker went down.
When a bubble is popped nothing seems to wrong at first, but the alarms being raised by financially knowledgeable stakeholders should be taken seriously. Everyone’s debt is someone else’s asset and the whole tapestry can be torn to shreds if a large thread breaks at a time when everyone’s tightly leveraged. And things can unravel fast.
2) The Evergrande customers video’d holding various executives hostage in their offices beg to differ with your sanguine take on their financial damage and prospects of recovery.
3) The fact that Chinese families use surplus apartments as investment vehicles is well-known. Oversupply in housing has inevitable and painful consequences, just as undersupply does. It doesn’t matter if eventually the housing towers end up 1/4 or 1/2 filled… if they aren’t fully occupied the money spent to build the spare units is malinvestment.
Eventually, they are occupied. Chinese families buy a home in advance for their son when he gets married. This happens at age 30, so the buildings can sit a long time. They are sold as unfinished concrete shells, so they do not deteriorate any more than a bridge abutment. In our building, new in 2010, the units above and below us were unfinished. The owners waited about 8 years to finish them and move in. Just a little dust and some cobwebs, no deterioration.
Even if the family has more than they need, they can sell them in the future. China is growing, and every year millions of rural people move to the cities and need homes. They don’t buy the newest and most expensive homes, but the influx guarantees a good housing market for a long time. Outsiders who don’t know this make a lot of false assumptions about Chinese real estate. There is a 20 year project, only 5 years old, to move 300 million country people into the cities. 300 MILLION. As jobs become available for them, they will begin their journey to become middle class. This will move all their tiny farms into larger enterprises that are more efficient and make China more self-sufficient with food. 99% of the people are very willing to do this. The move means they will live in a modern home with indoor plumbing and central heat. They will have improved health care and their kids will get a better education. Every one of them will be leaving a stone house with a rudimentary coal stove that pollutes. The urbanization plan is also cleaning up the air.
People in the US completely underestimate the population scale in China.
The inflating and popping of financial bubbles is not a mechanical process. It is psychological. I continually read rationalizations why this mania (the biggest and worst ever in the history of civilization) will go on indefinitely. I read it here, all the time.
It will last as long as the psychological underpinnings remain in place and not a second longer, however long this turns out to be. It doesn’t matter what any central bank does or doesn’t do and this equally applies to governments or any other entity. The actual fundamentals even prior to COVID weren’t favorable (much less great), but mediocre and awful and have been since at least 2008.
The GFC was only 13 years ago and yet most seem to have forgotten it. The Federal Reserve and US government didn’t prevent it. It happened. Supposedly, the response kept it from getting worse but no one actually knows that either. It’s an assumption. If it did, it has only been “temporary”, as the distortions now are much worse than then.
It’s like bank deposit insurance. I assume literally almost everyone reading my post favors it. It has led to unsafe and reckless banking which the financial sector pretends is not so. Purportedly, bankers testified to this effect in the 30’s when the FDIC was proposed. Can you imagine that now?
Instead of periodic bank runs being spread out, this and other factors creating the current systemic moral hazard will ultimately coincide with a catastrophic systemic failure but it just won’t be recognized as a contributing cause by hardly anyone.
It has to be this way because 1+1 never = 3. There is never something for nothing.
It’s as if China wanted to prevent its corporations from getting too big, to prevent systemic risk and regulatory capture. Something that the US has consistently failed to do.
China already HAS a single organization that’s too big, captured, and out of control. It’s the CCP.
The CCP tolerates no rivals.
Don’t get me wrong – the Chinese people have come a tremendous way forward in the past 100 years, especially from 2000-2020. But that was a bumpy road, and the road forward isn’t a smooth upward path either.
Xi has become China’s first dictator-for-life since Mao, and the CCP has been implementing mass surveillance and control techniques, genociding Xinjiang and harassing its neighbors, and purging threatening “elements within” (including their associated economic interests). That is all a big step backwards for an otherwise great nation.
China is systematically deflating there bubble the whole world lent them money to build the economy now just default brilliant strategy must be watching USA
This is interesting insight thank you for it.
What I think is most interesting is how Chinese property investors believe that the government will fix everything. As an American who’s much more skeptical of government “fixes”, it’ll be interesting to watch the next few years to see if the Chinese communist party’s cure is worse than the disease.
The “American Financial Press” only knows two things, bubbles and bailouts. Looking at China through their lens is unfortunate. Jim Rogers says when they let Evergrande fail, they are being good capitalists, I do see some danger that if China doesn’t handle this problem in using Central Bank methodology (whatever it takes) that will create some problems. Now there are scandals at the IMF and World Bank (rigging China’s data) and insider trading at the FOMC. If we were in China there might be a few executions. Through their lens the west must seem to be peak decadence. Hard to be objective here.
I disagree. Of course in China everything is played down. However, Evergrande’s insolvency was warned about in 2012. Moreover, other real estate developers in China are in similar straights.
Lehman’s collapse was unexpected and its effects unforeseen by most of the public or government agencies. This will be the same. Even if Evergrande is being bailed out (despite the inter-CCP-gang warfare going on), there are limited resources in the CCP government and the local municipalities’ secret debts are also GIGANTIC.
Re: lack of ‘hysteria’ in Chinese press.
What happened to the Chinese doctor who first noticed a new type of sudden acute pneumonia (Covid) He posted it on line and…was arrested!
He was guilty of creating alarm or something. He signed a statement promising to behave and was released. And of course he wasn’t being hysterical. He was doing his job.
During a downturn in the Chinese stock markets, short sellers were arrested.
Roddy, you are no doubt familiar with the ability of humans to adapt.
But if you want to remind yourself that you are somewhere different, imagine a doctor anywhere in the West being hauled in by the cops because he posted about new symptoms.
You aren’t going to read any dire predictions in the Chinese MSM. It’s illegal.
Looks like they’ll make the 9/23 bond payment. But there’s another one around the corner.
Only if you’re local. Foreigners need not apply for reimbursement. This double standard will have major negative implications for future foreign investment in China.
Negative implications for future foreign investmensts in China might be part of the plan.
The CCP’s plan has always been to take Western money then not pay it back.
They think westerners are too greedy, that they’re easy marks to con so they can just keep tricking them endlessly.
That’s funny, because it would be hard to find a more greedy, reckless gambler than a Chinese person. Crypto, unfinished airboxes, etc.
They didn’t and they won’t. The company has no money to spare for bond payments that come with a 30 day grace period anyway. So at the end…then what? The bondholders do whatever, but this usually means negotiating. EG’s ace here is, no one wants it.
Unless the founder is willing to put in his own cash, whatever is in the till will be needed for keeping the office open. lights on and paying lawyers, etc.
– “There’s a crackdown on all kinds of other activities that include reporting financial news and analysis in a way that the government doesn’t approve.”
Is Wolfstreet blocked in China?
No.
Engin-ear,
Chinese authorities don’t care one way or the other about the foreign financial site, WOLF STREET, which has very few readers in China, most of whom are expats (using English language keyboard settings). Just a smattering of readers in China use Mandarin keyboard settings.
In a country with 1.3 billion people, this site really doesn’t matter.
China is big.
One company has 1.4 million unfinished apartments, while the company’s founders have 4 or 5 billion dollars.
50/50 the Government there hangs that guy upside down from the top floor of a tall building and waits for the money to drop out.
Sounds like that would be a welcome outcome for bezos musk fink
Great article.
I hope this case will contribute usefully to the international debate “whether the debt [of systemic institutions] matters”.
‘There’s a crackdown on education tech companies that sell off-campus educational courses that have driven the costs of education into the sky, discouraging Chinese couples from having more than one child.’
this is a very strange framing (an increase in the supply of private education has driven the cost of education higher – really?) it might make more sense to say demand for private education has gone into the sky, driving up the cost of raising a child. obviously the government cares an awful lot more about bringing education back under the complete control of the government, and reducing the number of foreign teachers who could be indoctrinating the minds of the young with goodness knows what dangerous ideas, than it does reducing the cost of the lower middle classes having kids. it’s not as if they have to send the kids to weekend and evening classes unless they want them to score well enough on the university entrance exam to get into a good uni and make something of their life – which is in fact the real message of the the government’s decision to shut down the entire industry overnight, stop hoping your kids will improve on your social status, bcz they won’t. everything that is happening here is about tightening the grip, nothing else
I walk my granddaughter, age 6 to school and back. I also walk her to after school English classes, and art and dance classes, and swim and calligraphy classes. These are all private for-profit enterprises. We can afford it, but I see the point. It creates an inequity. A lot of blue collar and poor kids don’t have these classes. Providing the greatest good to the most people is a goal of Xi now. There is a backlash against what is perceived as Western style music and movie hysteria. China is doing what is good for China, and they don’t care what the American media thinks about it.
The government dosn’t have to go on TV with speeches and charts and graphs to show the people how much life has improved. Everybody knows they are better off this year than last year, and ten years ago. There is nothing that creates more loyalty to the leadership than this.
I have lived for many years in different cultures, each of which has it’s own set of weaknesses and strengths. Among the major flaws in American thinking about the world, two things have seemed salient to me:
1. Americans have been conditioned to see things in black and white. This was purposefully programmed into the culture starting with the expansion of the American world hegemony at the end of World War II. The American oligarchs knew that to get Americans to accept a national security state that extended itself globally (military and economic), they had to convince people there was an epic battle between communism / socialism and “free world” capitalism. Somehow Americans were convinced that it was okay to violently overthrow any form of foreign government that didn’t become American puppets.
2. When Americans criticize some aspect of another culture, they seem so weirdly blind of flaws in their own culture that are sometimes the same or sometimes worse. For example, the ballooning costs of higher education over the years, making it a heavy burden for the middle class. Or the unethical private trade or tech schools in the U.S. which have profited by students getting loans after being lured people in with false promises. The murders and rapes in American culture. etc.
Very good comment, thanks for taking the time to share!
World travel is great for helping you to see the plank in your own eye rather than the mote in someone else’s.
but you don’t make blue collar people feel better off by banning white collar workers from buying a random luxury good when they’ll just spend the money on sth else instead; policies to improve blue collar workers effective income (eg cheaper school or university fees and healthcare) would do, but don’t hold your breath
I don’t care what the US media thinks either
I live in guangzhou, and ‘m not sure at all that most people feel better off than a year ago
just because you have popular support doesn’t mean you don’t want even greater control over foreign influence. remember Hong Kong
‘China is doing what is good for China’
Isn’t it impossible to generalize what is ‘good’ for 1.4 billion people?
Who decides that: Big Brother?
Is what is good for the CCP necessarily good for China?
‘Everybody knows they are better off this year than last year, and ten years ago. There is nothing that creates more loyalty to the leadership than this.’
I am not willing to accept money in return for not saying or writing what I think. (But I would shut up if I thought I might go to jail!) I suspect some of the 1.4 billion also can’t be bought.
You are welcome to sacrifice earthly possesions and a more prosperous lifestyle for an invisible thing called a “right”. It is your right to do so. Many people on the planet see things a different way. Never the twain shall meet. It’s the difference between East and West.
Then what’s all this CCP hoopla about Confucius? I don’t recall him being obsessed with material goods. Or are the ‘Confucius Institutes’ in the West so named to make them more acceptable here?
You describe this as West meets East. I disagree. Lots of people in the West are obsessed with wealth and no doubt so are many in the East. There will be others who aren’t. However, the first priority is survival and a literal struggle against starvation will be remembered by many older Chinese. The Mao Madness is not ancient history.
BTW: the definitive biography of Mao is banned in China.
The best thing that the national and local governments can do is to open up the Hukou residential system of registration so children of rural immigrants can go to school. Most of the recent comments on inequality is to promote the increase in family size. China has huge demographic issues. Transversing the middle income trap will not be easy.,
Thanks for mentioning Hukou, which we haven’t heard much about from our China experts. A large swath of the population is designated ‘Rural’ and if they have kids, so are their kids. I believe they have to get permission to move to the city. This is just to work and does not change their status.
“Everybody knows they are better off this year than last year, and ten years ago.”
It’s a good thing that stuff only goes up in a straight line. Because if there was ever a lost decade like 1990s Japan…
Sometimes staying alive is being better off than last year or ten years ago.
“this is a very strange framing (an increase in the supply of private education has driven the cost of education higher – really?)”
Have a look around in the USA. Have cost of education gone up or down with a shift to private for-profit education? There is more to price discovery than just supply and demand.
I have no idea about the US, because I live in China. but clearly there is nothing more to price discovery than changes in demand and supply, in this case an increase in demand for private education and the growth of an industry to meet that demand
The increasing cost of “education” is due to the student loan program which enables these “customers” to otherwise afford something they otherwise obviously cannot, not private “education” or any increase in supply. Supply increase reduces cost pressures.
In a rational financial environment, no profit seeking entity would loan many if not most students the amounts they receive. Those turned into debt serfs lack the actual capacity to pay it back. It’s only because of government guarantees first and the loosest credit conditions and lowest aggregate credit standards in history that enables it.
Businesses have pushed their training costs onto the government dime.
@JV
UK has raised private education inequality to an art form where every aspect of power in society is in the hands of a public schoolboy who also got priveledged access to Oxbridge.
That’s why all the engineers left the country after we built the industrial revolution.
Maybe the Chinese studied what happened to UK.
Just sayin’
Competition for eyeballs on the internet, TV or newspapers. That’s all this is. Everything in the media is hysterically exaggerated. Every day we’re
going to die, see the market crash or global warming will cook us like eggs.
Terrible things happen very infrequently. Nothing to fear but fear itself. We had a market crash 12 years ago, then everything went back to the way it was. We have a pandemic where 99.8% don’t die. Global warming will raise sea level a few millimeters a decade.
Yawn.
“Global warming will raise sea level a few millimeters a decade.”
The global warming is a poorly explained phenomena.
My understanding is that the projections of industrial pollution, drinkable water depletion and climate change will force several billions people to quit their homeland to seek a new homeland … on the land already occupied by other several billions people.
To manage this gracefully, better to prepare the solutions right now.
As for the speed of climat change, it is not linear as most of things in nature – slow now, quick later.
The 1.5 millimetres a year rise isn’t “slow” but the rate we have had for roughly three thousand years as we finish coming out of the ice age of 11,000 years ago. The best way to measure if sea rise is what they say, is to go to the coast, such as San Francisco and see if there has been any change…remember water finds its own level… If there has been none or little change then you know somebody is telling porky-pies………..
Nearly forgot, you also need to find out if the land is rising, staying still or falling….
I saw a conference recently where someone beleivable (scientific mind without obsession for fame and money) claimed that 20,000 years ago average temperature was only 5 degrees lower and Europe had Siberian climat.
I might not retain correctly the timeframe, but I got the idea that the main danger of climat change has little to do with coast line real estate.
The NASA sea level rise observation website puts rise at 3.4 mm/yr.
Miami is sinking due to ground subsidence. Some South Pacific islands are sinking due to plate tectonics – subduction zones.
@A
How do you measure ‘the sea level’?
If it’s up here, it’s down there, as the water follows the gravitational pull of the moon and sun which are in constantly varying relative positions.
Apparently some double glazing salesman managed to sell a sattelite to the EU which claims to measure the level of the sea to within 1mm or something.
You can sell anything to a bunch of bozos spending other people’s money.
Auldyin,
Tides and sea levels have been well understood for many hundreds if not thousands of years. People have been able to predict tides for a very long time, for each day in the future. For a long time, tidal charts have been published for various points on the globe so that seafarers and fishermen could look up what tides they would face days and weeks in the future if they didn’t want to calculate them on their own. Once you know how to measure the tides (high tides, low tides, their magnitude and the times they occur), you can calculate the average sea level. But today, hey, there are altimeters and satellites and other methods that measure sea levels. It’s not rocket science. The moon runs this show.
“Everything in the media is hysterically exaggerated. Every day we’re
going to die..”
I’d agree that many things are exaggerated, some hysterically. Not everything. But in my opinion most concerned people do not worry that they are going to die today. People worry about their children, and the future of humans in the world, both near term and long term.
BTW, the cv-19 infection fatality rate (IFR) for people over 65 is over 14 percent. So for us old codgers, it makes sense to strategize ways of avoiding things that result in an immediate 14 percent chance of dying.
Re “We had a market crash 12 years ago, then everything went back to the way it was.”
You seem to have missed the part in that process where about $10T was extracted from the middle class and transferred to the 1%. Things are NOT the way they were, and anyone who was in essence “legally robbed” in 2005-2010 is well aware of the price they paid.
As an example of how things are NOT the way they were – see the running Gallup polls which track whether people think the country is on the right path or not. Those numbers cratered in 2008 and haven’t recovered at all since then, regardless of who is President or who controls Congress.
To continue…
21 Trillion (TRILLION!) in new national debt….
and the value of the dollar buying power…
down 17% from 2009 to 2020…
and now down another 5% + from 2020 to 2021…
and counting….
and the Fed’s balance sheet from $800 billion to north of $9 Trillion…TRILLION
And the financial press is giddy with apprehension over ONE company on the other side of the planet? This sounds like an attempt to divert attention from the real problem.
Not ONE company, but an entire and HUGE sector.
I never recovered from the GFC and never will, because things are worse now than I can remember them ever being.
Millions have never recovered or were financially ruined after the GFC. Apparently, that doesn’t count if you aren’t one of them either.
Mark,
“We have a pandemic where 99.8% don’t die.”
Such an idiotic, braindead, and HEINOUS thing so day: The 7-day average is 2,000 deaths per day in the US of Covid. That amounts to 5 large Boeing jets crashing every day, killing everyone aboard, day after day. So no big deal? When 1 single jet crashes in a year, it makes global news.
Mark,
We’ve lost more Americans than the 1918 pandemic. Most people know someone who passed away from this thing. This IS a big deal. I think the difference is back then it was the breadwinners of the family that got hit the worst. Now its senior citizens mostly. So no one cares as much about them?? Not a good sign for a civil society.
I can think of only one news station that does not care about seniors.
Seniors were effected in the early days, and thats why they had priority for free vaccinations.
Now, its the younger, under 40s, who are dying. Idaho has a state wide DNR for patients over 18.
And the flu was not preventable. In fact in 1918 they didn’t know what a virus was. You can’t see it under optical microscope.
But for this one there is a vaccination, that folks who drive cars, fly on planes etc. supposedly went to school, don’t believe in. Who would think you’d find a stone age tribe in suburbia?
Context:
1918 US Population approximately 105,000,000
2020 US Population approximately 331,000,000
Well technically he isn’t wrong. From worldometers.
Number of cases: 230,565,821
Deaths: 4,726,699
99.8% did survive.
This site likes to quote numbers, hei that’s the numbers. The deaths are of course regrettable, but the numbers are the numbers.
Pretty sure this will get blocked.
WAIT I WAS WRONG. AND THAT’S THE POINT. THAT’S 2 PERCENT!!!
The guy was off by a couple of decimal points.
MonkeyBusiness,
You’re either also braindead or steeped in heinousness if you cannot get what Mark said. I’m just so sick of this braindead heinous shit. After 18 months and nearly 700,000 dead Americans! This is NOT funny.
Wolf, I am sorry I wasn’t clear. My first post was meant as an example of how I’ve seen people making that 0.02% argument. I obviously disagree, so I asked one person to show me the math.
So apparently what these deniers are doing is simply dividing the number of deaths/number of people who recover. The thing is you need to multiply the number by 100 to get a percentage number!!!
OK.
If you think that sea level rise is the main issue from climate change, you haven’t thought it through.
@M
Ah! but the neurons are still firing away in there Mark.
I like your thinking.
What of the videos of the massive detonation of hundreds or maybe thousands of apartment units built in ghost cities built years back that I saw recently?
They have demolished some apartment towers that were not completed and vacant for years. Some cities have high vacancy rates, especially tier 2 and tier 3 cities. Evergrande has a high vacancy rate for its buildings as do other parts of China. Ghost cities are slowly filling, not full. They face an aging work force, population growth may have been due to people living longer, while the fertility rate may have declined. There are rumors of a recent population decline. Some state statistics are suspected of being manipulated.
Or maybe more people have passed away from COVID than being reported
Alan, I hate to tell you this, but sometimes, when people are trying to exaggerate their point or make money or both, they post bullshit videos. I know, I know, shock horror, right?
There is stock footage of many apartment buildings being blown up in the world and demolition fanatics make big compilation videos of these and post them online.
Then some memer gets the compilation video and, I shit you not, reposts it with a serious looking caption that says “These are Chinese ghost cities being destroyed.”
You know why? ‘Cos if a demolition video is posted with an ominous sounding caption, it gets far more clicks, likes and subscribes than the very same demolition video without the ominous sounding caption. So wake up. It’s the 21st Century. FFS.
Yep. I’m reminded of a video during the Cash for Clunkers debacle (an idiotic program I vehemently opposed), showing car being destroyed, as required by the program. The car was perfectly waxed, cleaned and detailed, which no one would do before destroying the car. The video was clearly a propaganda video, but suckers bought it right up.
‘Re-upping the stunning demolition videos showcasing housing oversupply in China: 15 skyscrapers in China that were part of the Liyang Star City Phase II Project were just demolished after sitting unfinished for eight years due to absent market demand.’
That’s a pretty specific location for stock footage. If a guy lived or owned in that complex, you’d think he’d be upset at the ‘fake news’ .
15 buildings is small potatoes. That’s just an average apartment complex. A blip on the screen. People who comment on these things can’t comprehend the scale of infrastructure construction in China.
Nick, I am aware of that. Alan said it was thousands. Are you actually trying to deny that memers do this sort of thing to anything that might get an audience of suckers? Tell me Nick, if 15 demolished skyscrapers made the international news, why didn’t thousands? It ain’t propaganda if you are predisposed to believing it. Get it?
OK let’s divide Chinese pop by US. About 4. Tell me when 3 new buildings have been demolished in the US. Or one.
People saying ‘I live in China and this is no big deal’ is a good example of not seeing the forest just the trees. There is an ocean of financial commentary that agrees: this is the biggest financial crisis since the economy was opened up by Deng. It’s not just one company, it’s a bellwether for the RE sector which is 50% of the Chinese economy.
I love these ‘oh it’ll just be bailed or taken over by the govt’
Just when the CCP is trying to to scale back SOEs.
The CCP does not want to take over the completion of 1.2 million units.
Does it doom China? Of course not, but before saying the CCP will come in and solve this, remember, this whole RE bubble happened under its control and encouragement. And it was something to which they were completely new
Maybe they were in over their heads.
I am no fan of communism, BUT I must say I admire what they are doing to the financial power players.
We could use some of that tough love on this side of the globe, post haste
Sooo….
The barbarians have sent a delegation to the Middle Kingdom to ask for protection of their investments.
Hmmm….
Perhaps looking at past articles by Wolf on the court process for recovery of capital after bankruptcy may give some indication of exactly how much the middle Kingdom is really going to care…
A few days ago, on another post, I posited a theoretical notion that if Xi and China wanted to make a power move, now was the time. If one supports the notion that the West is weaker and more fragile than any point in the last millennia, fragile economies, fragile markets, fragile sovereign debt and, perhaps most of all, fragile societies, then now would be the best time for a Chinese Lehman moment, in particular if China has successfully (secretly?) externalized a large amount of its debt to the West. Then, the Dragon Throne could selectively bail out Chinese companies (with some kind of hair cut/punishment for over-speculatin’), while letting the Western players burn and igniting a cascade collapse at a time Western CBs are least in a position (both financially and politically) to initiate ANOTHER large-scale bailout of the wealthy players. If the headline is true, Evergrande is making interest payments to local (Chinese) entities, while a default is in the works for the Foreigners. Will be interesting to see how this plays out. Is China pulling a high/low, knocking down the West and initiating a collateral re-hypothecation do-si-do? If you’re serious about winning, there’s no time to kick your enemy than when they’re down, delivering repeated blows to the head. Checkmate China after brilliant play by Xi.
This is not a novel, nor a field to exercise hobby horses. It is the largest Chinese financial crisis since China abandoned Marxism.
People fail to realize that China plays the long game better than anyone on this planet. They can’t be part of the ISS. Well OK they just created their own. China plans hundred plus years with tweaks and modifications. US runs on 2/4 year political cycle. Yes we do have a very big military. However I think that we just have the biggest rock today. Tomorrow..well that has yet to unfold
I posted something similar recently also, it could be game of beggar thy neighbour.
I would not want to be in the place of the owner of Evergrande now, when everything is resolved with the help of the state they will have a life sentence or a death sentence.
Especially seeing the owner and his wife sucked out $5 Billion in personal dividends over the last couple of years. Sounds like pocket change, but I’ll bet the Chinese gov will go after it.
You bet. China will not stand to be played the fool. Wouldn’t be surprised if they publicly executed the couple. I don’t advocate that. It just that China goes after those that embarrass the CCP
Wolf wrote….”In China, there is nothing gingerly about it. The government has put down its foot to allow for more competition and to shake up the sector, knock down the power of the billionaires a few notches, and reduce wealth inequality from the top down.”
Hmmm…..sounds like China has learned from America’s mistakes.
Big picture is in a debt bubble, the bad investments have already been made and you can not escape the damage. The key is what policy do you take to resolve things to limit the damage to society.
Ideally in a democracy people have a vote to hold policy makers accountable.
The public wants “solutions” without negative consequences. H.L. Mencken’s attitude toward voters in his day is even more applicable now.
The voters are only somewhat less bad than the elites who are plundering them, with too many apparently believing in some of form of birthright where they are entitled to minimum living standards at someone else’s expense. I see this expectation and belief here too in the attitudes expressed towards medical care, regularly.
It’s a known known.
Now for the known unknowns….
Girolamo Pandolfi view of Evergrande
Summary:
1) This isn’t going to be AIG or Lehman because the counterparties are unitary and government
2) The crackdown isn’t political (foreign) but more because of the business practices of the sector in general and Evergrande in particular, specifically that:
a) They would overbid for properties because they knew full well that banks and buyers would be the ones holding the bag at the end
b) This overbidding process accelerated the housing bubble in China
c) The end result is lost rent and buying affordability
3) The Chinese government traditionally has not allowed its private citizens to end up holding the bag; the owners and foreigners, much less clear
4) The whole situation should not surprise anyone. China’s government laid out clear rules more than a year ago concerning liability to asset ratios, cash, etc which are not outrageous.
5) Contagion is already occurring. China’s building sector drives the mining industry and the miners are getting crushed in the stock market.
Now read my article.
Not sure that Wall Street should be celebrating because the “onshore bonds” interest payment will be made. My guess is the Chinese idea was to save the small Chinese investor yuan (who might hang a few officials if their money disappears) but fleece the foreigner (who whine a lot but don’t do anything-just send them more stuff/junk), which means I’m not so sure they are going to pay the “offshore” bondholders with (real?) US dollars. It appears that the Chinese leadership haven’t quite bought into true “Globalism”. That is its leadership need to join, not oppose, the world’s rich and powerful in fleecing the earth’s population at will, while the few paid media and academic toadies celebrate them and their actions You just have to keep the population dumbed down….so more gambling, video games, ponzi schemes, strange people on TV…not less….So I’m not sure they get it….time to plan for another meeting….I’d send Lagarde and Yellen this time….
I don’t think Wall St is celebrating because Evergrande made an interest payment. The drop on Monday lacked confidence … I mean just check the volume. No one’s panicking … yet.
Relax, its just a Chinese F.I.R.E. Drill, a rearranging of assets.
The Ministry of Right Thought has evaluated this statement and holds that you are in violation of ThinkSpeak regulations. Specifically, this has all the Vapors of singing that you believe yourself to be Turning Japanese. In this regard, we do not care if all your Dickies are Stuck In A Pagoda With Tricia Toyota…at this point, the rearrangement of ass sets in an open top auto mo contraption (or other horseless conveyance) shall hence forth be referred to as “sit-on-it adjustments”, wherein any increase in space greater than a baby tram shall not be included as part to the inflationary cost of expanding human waistlines. Please direct any complaints to the director of the department of we don’t give a rat’s azz.
Read Michael Pettis’ latest article at China Financial Markets.
Nobody is exploring the contagion of Evergrande in regards to what it owns outside of China. A developer this large and rich will surely have projects outside of China. What happens when they start to dump those projects to pay the bills in China. It’s eerie how nobody is talking about this.
China has been adding more coal burning electric power plants than anyone else. As the price of LNG rises, they have planned to build dozens more.
The Guardian reported: “China, India, Indonesia, Japan and Vietnam plan to build more than 600 coal power units” 6/21
China once dreamed of a carbon free future. Plans have changed.
They also have how many nuclear power plants in operation or underway?
Let’s not cast too many stones here, cause the entire west has been using how much coal for how long to power entire industries and countries.
Unless we are going to manufacture 10 billion solar panels each with Tesla batteries for Asia…. Hmmm, can we get a tweet going in a few minutes, let me go buy some TSLA options.
@DH
Yesterday Xi at the UN said he would stop funding any more belt&road country coal power stations. That was his big concession to the World must do something crowd.
But don’t worry Europe is lighting up all it’s old stations because the wind isn’t blowing, the sun isn’t shining and China is buying all the gas. The EU has fined Poland 500k every day for burning coal.
Poland has told the EU to get stuffed like most folks do.
You are so correct in what you said… and it’s absolutely f’ing hilarious. But did you notice what he didn’t say, and did you consider what it means for China that belt&road would be going with renewables?
Let’s see:
– Is China going to stop building coal plants or reduce their usage?
– Who is going build those solar panels and wind turbines?
As for Europe, well, we’re sure glad Angela decommissioned all the nukes, it’s hilarious considering her former profession, she must’ve really hated that job as an East German. Now she has to go with Nord stream 2 for dirty nat gas from the evil Russians. How dare she, didn’t she get the mainstream memo?
But somehow the French aren’t jumping on that bandwagon…. where is the lecture for the French on using dirty nuclear instead of clean solar panels and wind turbines.
@MCH
Who needs @Game of Thrones’?
Apparently we now have a Taper Timeline…
Taper to begin Nov 2021
Taper to finish mid-2022
…or so they say
“Fed doubles daily counterparty limit for overnight reverse repos” Now it’s at almost 1.3T$ Daily!!! Money is officially worthless. Nobody wants it!
Giorgio,
“Now it’s at almost 1.3T$ Daily!!”
Nonsense. Repos are in and out transactions. Overnight repos unwind the next business day and go to zero because the Fed gets its securities back and the counterparty gets its cash back. Reverse repos are the opposite of QE, and the Fed absorbs cash instead of printing it. Reverse repos: counterparties LEND month to the Fed. Total reverse repos = $1.28 trillion.
Ha ha, we could all wish that the Fed is printing $1.3T daily…
“Evergrande”
You couldn’t come up with a more ironic name even if you tried.
“Everflush” maybe?
Masterful article W, I’m amazed how you get the time to research all that stuff. I must be wasting far too much time drinking whisky.
One little comment.
The Asian countries have one enormous golden advantage over western countries. Their citizens save money like mad. In the West we borrow money like mad.
Savings and investment are synonimous, investment and growth are synonimous.
I think the Chinese govt will support all private savings because the last thing they want to do is to damage the savings habit.
When the dust settles on all this I’m being told they will be looking to attract foreign investor money into their SME sector.
Couple of years before I’ll be looking.
I get the point W, I’ll drop it, but we’ll see who’s right in the end.
ps. I was being sarc about the sea level.
Just sayin’
Great post Wolf!
Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
Policymakers sooner or later use the economic growth model of the Roaring Twenties, oblivious to where this is leading.
We had the financial crisis in 2008, and were left facing a Great Depression.
China embarked on its economic suicide mission after 2008.
The financial crisis is near.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
No one realises the problems that are building up in the economy as they use an economics that doesn’t look at debt, neoclassical economics.
As you head towards the financial crisis, the economy booms due to the money creation of unproductive bank lending, as it did in the 1920s in the US.
The financial crisis appears to come out of a clear blue sky when you use an economics that doesn’t consider debt, like neoclassical economics, as it did in 1929.
1929 – US
1991 – Japan
2008 – US, UK and Euro-zone
The PBoC saw the financial crisis coming and you can too by looking at the chart above.
The Chinese were lucky; it was very late in the day.
The Chinese had done the same thing as everyone else, but worked out what the problem was before the financial crisis.
They are still on the edge of the precipice, and might fall in like everyone else.
The Chinese have made all the usual mistakes of neoclassical economics.
The economy roared on the money creation of unproductive bank lending.
They used bank credit to blow up a real estate ponzi scheme.
Their real estate market and their banking system are closely coupled.
If the real estate market collapses, so does their banking system.
What a mess.
They do have some advantages.
They understand the problem, as they have worked out what went wrong.
They have a lot more control over their banking system.
They can see the problems with the Western solution, where we keep all the asset price ponzi schemes going, and just make the problem worse in the long run as the bubbles get bigger and bigger.
How will they fare?
Keep watching to find out.
What have the Chinese worked out?
What we call a “black swan”, the Chinese call a “Minsky Moment”.
Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
The black swan flies in under our policymakers’ radar.
They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
The PBoC knew how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.
Let’s have a look at the US private debt-to-GDP ratio.
At 18 mins.
1929 and 2008 stick out like sore thumbs.
What about inflated asset prices?
“It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.
When this ponzi scheme of inflated asset prices collapsed it took out the financial systems of the US, UK and Euro-zone.
A year later, and they had made further progress.
Davos 2019 – The Chinese know bank lending needs to be directed into areas that grow the economy and that their earlier stimulus went into the wrong places.
They had pumped bank credit into areas that don’t grow GDP, and the private debt-to-GDP ratio had risen to a level they were on the verge of a financial crisis.
Everyone does that with neoclassical economics, but they don’t usually see the financial crisis coming, like the US in 1929, Japan 1991 and US, UK and Euro-zone in 2008.
That’s the problem, isn’t it?
Yes, it is.
Banks – What is the idea?
The idea is that banks lend into business and industry to increase the productive capacity of the economy.
Business and industry don’t have to wait until they have the money to expand. They can borrow the money and use it to expand today, and then pay that money back in the future.
The economy can then grow more rapidly than it would without banks.
Debt grows with GDP and there are no problems
The banks create money and use it to create real wealth
When you have a firm grip on what money and wealth really are; and know how banks work, it all falls into place.
The Chinese have worked it out already.